February 20, 2018
Agency yields were higher this week and the curve flattened in response to higher than expected CPI data on Wednesday. On the week, two-year Agency yields increased 13 bps to 2.22%, 5-year Agency yields improved 10 bps to 2.68%, and yields on 10-year Agencies were higher by 5 bps to 3.23%.
Yield spreads for Agency bullets compared to Treasuries were unchanged, while yield spreads on Agency callables widened 3 to 10 bps, depending on the structure and call tenor. Callable structures with 5-year finals compare favorably to bullets because of the enhanced relative value on a yield spread basis (see graph below). In the near term, expect agency spreads to trade in recent ranges, although 5-year spreads remain vulnerable to some widening.
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||554,000,000||–|
|Federal Home Loan Banks||1,084,000,000||15,000,000|
|Federal Home Loan Mortgage Corp||100,000,000||25,000,000|
|Federal National Mortgage Association||–||–|
|Federal Agricultural Mortgage Corp||7,000,000||–|
Last week, Freddie Mac priced a new $2.25 billion 3-year reference note due on February 16, 2021. The highlight of the agency large bullet calendar in the week ahead will be FHLB’s announcement on Wednesday of any plans to sell global bonds.
Notable activity last week included:
- 7M of Federal Home Loan Bank callable in January and February 2019; maturing in 3 to 7 years
- 2M of Federal Home Loan Bank step-ups maturing in 4 to 5 years
- 21.6 of Federal Home Loan Mortgage Corporation callable between May and September 2018; maturing in 3 to 5 years
- 22.3M of Federal Home Loan Mortgage Corporation callable in February and March 2019; maturing in 3 to 5 years
- Adding convexity by specifically targeting the shortest 3% possible at a discount
Ricky Brillard, CPA
Vining Sparks, IBG